LLC Formation

When to use an LLC

• Reduce Operation Costs of Ownership through the use of Multi-member LLC
• Limit personal liability for non-operating members
• Simplifies transfer of members interest
• Avoids need to transfer fractional interest

LLC vs Co-Ownership

Co-Ownership – Legal title is held by each owner as Tenants in Common or Joint Tenants with Right of Survivorship

• Non-Operating owners may be personally liable for negligence of the operating owner
• No need to file ownership documents with the state or file tax returns
• Rules of ownership and operation governed by agreement among owners
• Each owner must be included on the Bill of Sale and A/C Registration documents

LLC – Limited Liability Company owns the aircraft. Each co-owner is a member of the LLC

• Members are not normally liable for negligence of other operating members
• Must file LLC Articles of Organization with State and file annual Federal and State tax returns
• Requires a higher degree of organization of rights and duties of each member
• Allows for simpler transfer of new members
• Makes purchase, sale, or transfer of aircraft shares easier without need to re-register.

Single Member LLC for personal non-business use – No real advantage

• Single member is fully liable for own negligence if being used as alter-ego
• Must follow all the formalities and costs of a having an LLC

Financing

Often one or more member may choose to obtain financing to buy into their share of the LLC. It is not recommended that the LLC obtain the loan unless each member is willing to agree to personally guarantee. It is best for each member come up with their entire share of the purchase.

Registering an LLC

The LLC name must be on the Bill of Sale and Registration Form 8050-1

The LLC should check “Corporation” on item #3 of Form 8050-1, and use the LLC name under “Name of Applicant”

FAA requires copies of the Articles of Organization and written LLC Statement
LLC Statement must detail:

• Full Name of LLC, date, and State of formation
• Name of each member and type of entity
• Whether LLC is manager managed or member managed. If member managed, name of each managing member
• Whether members or managers may act independently
• Citizenship status of all members. If a member is not a US citizen, an explanation must be given
• Must notify FAA of change in management from manager to member managed status

LLC Operating Agreements

Governing document that details each members interest, rights, and responsibilities. It should incorporate aircraft operating rules in the agreement or separate document.

Name(s) of the managing member(s)
Specifies each members ownership percentage
Details how and when additional contributions will be required
Voting rights of members
Transfer of interest by individual members

• Death
• Loss of Medical
• Move away
• Admission of new members

How valuation will be determined in each case

• Right to buy out leaving member
• Reserve funds for overhaul, upgrades, unexpected maintenance
• Insurance – too many members can make it look like a flying club (higher rates)
• Taxes – Federal, State, Local

Rights and Duties as agreed by members to designate managers

• Tie Down – Hanger
• Scheduling
• Maintenance
• Banking
• Accounting

Permitted Operations

• Recreational vs Business Use
• International Ops
• Condition after use
• Currency/Recency
• Instruction
• Scheduling priorities

Dispute resolution

• Governing Law if members are from different states
• Arbitration and Mediation

Transferring LLC Interests

Sale of Aircraft

• LLC is the seller and transfer to buyer on FAA Bill of Sale
• May have tax consequences for selling members

Member’s Interest in LLC

• This is a transfer of the members interest to other members or new member
• Governed by LLC Operating Agreement
• No sales or use taxes as it is not a sale of tangible personal property
• No FAA Bill of Sale or Registration change required
• Seller may have income tax consequences

Legal Considerations

Leasing – LLC leases the aircraft to its members

• Tax consequences occur because the LLC is in the business of renting the aircraft.
• A member using for personal use is simple.
• Same member using the aircraft for business can account for the rental charges as part of his/her business expenses
• LLC must make appropriate accounting of collection of fee’s and expenses (including depreciation)
• Passive losses can be divided by members and used as passive losses to offset individual members other income.
• May be able to defer sales/use tax at purchase, but may have to pay sales/use tax during leasing period.